Waiting for Copernicus

It’s happening in Buenos Aires. It’s happening in Paris and in Athens. It’s even happening at the World Bank headquarters.

The global economy is finally shifting away from the model that prevailed for the last three decades. Europeans are rejecting austerity. Latin Americans are nationalizing enterprises. The next head of the World Bank has actually done effective development work.

Maybe that long-heralded “end of the Washington consensus” is finally upon us.

After the near-collapse of the global financial system four years ago, obituary writers rushed to proclaim the death of the prevailing economic philosophy known as neo-liberalism. “Wall Street’s financial meltdown marks the end of an era,” wrote Michael Hudson and Jeffrey Sommers in Counterpunch at the end of 2008. “What has ended is the credibility of the Washington Consensus – open markets to foreign investors and tight money austerity programs (high interest rates and credit cutbacks) to ‘cure’ balance-of-payments deficits, domestic budget deficits and price inflation.

It was a tempting conclusion. Putting Wall Street and financial speculators at the center of the universe had generated an economic supernova, and everyone seemed to get the message. Everyone except Big Money, which never received the obituary notice. After some minor tweaking of Wall Street practices, some bailouts of enterprises deemed too big to fail, and the injection of some stimulus spending to arrest the free fall, Washington continued with business as usual. The Obama administration, like the Clinton administration before it, discovered the immense power of the bond market. The IMF and the World Bank, meanwhile, didn’t fundamentally change their policies. And the European Union, led by tight-fisted Germany, continued to back austerity. All the major economic actors held to the old orthodoxy even though it flew in the face of common sense and common decency (though not in the face of the bottom line).

Wall Street’s continued irrational exuberance, its lavishing of bonuses on its elite, and its pushback against even the most modest of regulations all suggest that the old Ptolemaic system – with Wall Street and the Washington Consensus still at the center of the universe – had not yet given way to a Copernican revolution that displaces these powerful institutions from their privileged position. Such revolutions, of course, are not made in a day. Remember: Ptolemy’s system, with the earth at the center of all things, reigned for 1,300 years even as it grew inordinately complex to explain new astronomical observations. A century after the publication of the great Pole’s theory of heliocentrism, Galileo still ran afoul of church authorities for his Copernican leanings. Orthodoxy dies hard.

As a first sally against the prevailing orthodoxy of neo-liberalism, today’s economic Copernicans have taken aim at austerity. It’s a fat target: belt-tightening, after all, is not only unpopular but unsound. Paul Krugman marshals the economic evidence in the latest New York Review of Books, concluding that the “chances of a real turn in policy, away from the austerity mania of the last few years and toward a renewed focus on job creation, are much better than conventional wisdom would have you believe.”

Nowhere is that clearer than in Europe. There, the case for austerity, explainsWashington Post columnist Harold Meyerson, “was that once governments began slashing their spending and deficits, markets would reward them by investing in their presumably more productive economies. But the reverse has happened. As Greece, Ireland, Portugal and Spain have cut their budgets, investors have grown less willing to buy their bonds. By plunging themselves deeper into recession, these nations have convinced investors not that they’re fiscally virtuous but that they won’t become economically viable for many more years.”

French and Greek voters rejected austerity in the elections this weekend not because, as the U.S. media coverage implies, they are unruly children who refuse to swallow their medicine. Rather, they realize that austerity economics at this delicate moment could very well precipitate a double-dip recession (i.e.: a lot more pain). Moreover, they want the pain – and everyone knows that there will be pain – to be fairly shouldered. Francois Hollande, the new Socialist president in France, has called for a 75-percent tax rate on all earnings over $1.3 million. Nowthat’s a Buffet tax!

Don’t expect Hollande to appoint Occupy protestors to his cabinet. He “may not have a radical economic program sufficient to the task of reforming the French and European financial systems,” writes Foreign Policy In Focus (FPIF) contributor Jeanne Kay in The End of Austerity in Europe, “but he diverges from Sarkozy in one key aspect: government spending. Against Sarkozy’s line of austerity, Hollande proposes a more Keynesian plan of job creation in the public sector, indexing the minimum wage to GDP growth rather than just inflation, and public investment.”

The left has woken from its collective stupor just in time, for Europe at the moment is very much up for grabs. The far right has also rejected austerity, and it has a much simpler platform: blame the immigrants. The National Front in France has injected its xenophobic virus into the very heart of France’s center-right Union for a Popular Movement; the street thugs of Golden Dawn in Greece will enter parliament for the first time; Geert Wilders and his anti-Islamic chest-thumpers brought down the government in the Netherlands last month. Where the left has failed to provide a convincing alternative to austerity, the right has prospered.

Much rests on the shoulders of Hollande and the French Socialists. To them falls the responsibility of rebuilding a European left that returns the EU to its roots – a socialist market economy that grows together and preserves unity in diversity. To pull France out of its own doldrums, Hollande can’t think small. He must go big and, through persuasion and arm-twisting, rewrite the rules of European economic revival. Rejecting austerity is only a first step.

The Europeans could learn something here from Latin America, particularly Argentina. In the late 1990s, having racked up a huge debt, Argentina faced the typical recommendations from the international financial institutions: cut the budget, privatize government firms, remove barriers to outside investment. But Buenos Aires said no. It defaulted on $100 billion-plus in loans.

According to the rules of the game, Argentina should have been thrown out on its ear and forever banned from playing in the global casino. But that didn’t happen. Most creditors – 93 percent – eventually accepted the 35 cents on the dollar haircut that the government offered. Foreign investors, particularly from Brazil, continued to supply capital. Bargain-hungry tourists flocked to the country. Workers banded together to take over enterprises that owners had given up on (such as the Bauen Hotel in downtown Buenos Aires).

With a bit of luck – particularly the rise in price of soybeans, a key Argentine export — the country clawed its way back to economic health. Unemployment dropped from 25 percent in 2001 to below 8 percent in 2010. Social programs reduced the percentage of the population living beneath the poverty line from 51 to 13 percent (though it went up again in 2010). The recovery, like all recoveries, is tenuous, for it depends a good deal on the price of the commodities Argentina exports.

Which is why Argentina is going one step further to exert some control over the process. The government of Cristina Kirchner has nationalized Argentina Airlinesas well as pension funds, and it has also instituted measures to slow capital flight from the country. Most recently, it nationalized a key oil company, YPL, taking back control of the firm from a Spanish company that had a majority stake. “A poll conducted by Poliarguia Consultores published in the Argentine newspaperLa Nacion,” writes FPIF contributor Melissa Moskowitz in Annotate This: EU Response to Argentina’s Nationalization, “indicated that 62 percent of Argentines support President Cristina Kirchner’s plans to nationalize YPF. President Kirchner’s decision to promote and defend nationalization reflects growing opinion that the company has ‘not invested enough’ in Argentina ‘to cope with growing international demand.’”

Argentina is by no means the only country in the region to roll back the privatization mania. The Brazilian government increased its control over the oil company Petrobras a couple years ago. In Bolivia, the government of Evo Morales recently renationalized the electricity grid, which had also been in Spanish hands. This move comes after the nationalization of hydroelectric facilities and telecommunications. Venezuela, under Hugo Chavez, has made enlarging the state sector a populist rallying cry. And Ecuador has followed suit with laws to allow the government to seize oil and gas companies that don’t comply with national regulations.

Despite this new trend in Latin America, foreign investors have been flocking to the region. In 2011, the region saw a 31-percent increase in foreign capital. But here’s the underlying reason for the nationalizations. According to a recent UN report, “FDI revenue transferred back to the countries of origin has increased from US$20 billion per year between 1998 and 2003 to US$84 billion between 2008 and 2010 per year.” Sound familiar? Back in 1973, Uruguayan writer Eduardo Galeano wrote, “Latin America is the region of open veins. Everything, from the discovery until our times, has always been transmuted into European – or later United States – capital, and as such has accumulated in distant centers of power.” Latin American leaders are, with these nationalizations, attempting to stem the blood loss.

Perhaps they will get some help from an unusual quarter – the World Bank. The new head Jim Yong Kim is a health professional, not a free-trader like Robert Zoellick or a neocon like Paul Wolfowitz. One person can’t change an institution. But there are plenty of people at the World Bank who are waiting for this new kind of leadership. The 2000/2001 World Development Report, prepared by a team led by Ravi Kanbur and Nora Lustig, was an extraordinary effort based on interviews with more than 60,000 poor people in 60 countries. Alas, the Bank subsequently returned to its more traditional top-down approach. But Jim Kim’s is much more grassroots-oriented. Perhaps the World Bank under his leadership can help shift the locus of attention from facilitating financial speculation to empowering the poor.

A backlash against austerity in Europe, a move toward greater state control in Latin America, a change in leadership at the World Bank: this might seem slender evidence for a Copernican revolution in economics. The evidence for overturning orthodoxy might even have seemed stronger in 1999, when the Asian financial crisis prompted New Perspectives Quarterlyto ask economists Laura Tyson, Jeffrey Sachs, and others whether the Washington consensus was truly at an end (they saw greater “market pluralism” emerging). Moreover, a number of leaders like Barack Obama are styling themselves as Tyco Brahe, the Danish astronomer who attempted to combine both Ptolemy and Copernicus into an untenable geo-heliocentric system. These modern-day Brahes want to preserve the Washington consensus with only a few modifications.

As the world lurches from one economic crisis to another, and with the even larger crisis of global warming looming above it all, one thing is certain: there is no longer any consensus in Washington over what to do. Neo-liberalism survives, but more out of inertia than conviction. Meanwhile, out there in the world, the economic Copernicans are busy reconstructing the order of things.

Battling over Bases

The United States announced last week that it will withdraw thousands of U.S. Marines from Okinawa, finally fulfilling to a limited extent a promise made by Bill Clinton to reduce the U.S. military footprint on the island.

“The transfer of the Marines has considerable support on Okinawa and Japan more generally,” I write in an Inter Press Service article. “It has, however, generated concerns in the U.S. Congress, particularly over costs. At the end of 2011, Congress removed all the funding connected to the Guam transfer in the 2012 military spending bill, pending completion of an independent review. Key critics of the process of Pacific realignment – including John McCain, Carl Levin and Jim Webb – remain sceptical of the latest agreement since the review has not yet been completed. Also sceptical are anti-base activists in the places where the Marine presence will increase.”

Meanwhile, FPIF contributor Peter Certo looks at two new documentaries about U.S. military bases. “Scattered across the globe, far from the staid conference rooms and policy salons of Washington, are some of the world’s premier experts on U.S. militarism,” he writes in The Accidental Experts. “But they are neither the warzone refugees who have most borne its brunt nor the polished think tank professionals who increasingly populate the developing world’s capitals. Rather, they are the people who dwell in the shadows of the estimated 1,000 U.S. military bases speckling the planet.”

Averting War with Iran?

The first round of negotiations with Iran has raised hopes for a timely resolution of the ongoing conflict. “The Baghdad talks in late May are the last chance to reverse the torrent of sanctions slated to kick in around June, potentially driving energy markets into a tailspin and discouraging Iran from any kind of substantive compromise,” writes FPIF contributor Richard Javad Heydarian in Iran: Why This Time Is Different. “Unless key obstacles are overcome in the coming weeks, we are headed for a rough set of talks in Baghdad.

An international war crimes court in the Netherlands recently found former Liberian President Charles Taylor guilty of 11 charges. As FPIF co-director Emira Woods writes in The Strange Case of Charles Taylor, the convicted “is a man of many firsts. He’s the first head of state to have escaped from a medium-security prison in the United States. He was the first sitting head of state to face charges of international crimes against humanity since the Nuremberg trials. Now, he’s the first head of state since World War II to have been convicted of war crimes by an international tribunal.”

Our FPIF pick this week is Learning from the Octopus, marine ecologist Rafe Sagarin’s look at natural models of security. “His new book’s conclusion: we can learn from nature about being more secure by being more adaptable,” writes FPIF contributor Yunping Chen. “Nature, after 3.5 billion years of dealing with risk, is an experienced teacher.”